THE INCREDIBLY UNEVEN RECOVERY by Rich Karlgaard
Prior to this recession, the most notable feature of the late 20th/early 21st century economy was its volatility. The silicon chip, the Internet and globalism were accelerants to the renaissance of entrepreneurial capitalism that began in the late 1970s. Around the world, the storyline was familiar. New products, services, distribution paths and business models would appear out of nowhere and cause damage to the old and slow.
The global consultant, McKinsey & Co., summarized this effect in a famous 2005 paper called “Extreme Competition” (published in McKinsey Quarterly). “Extreme Competition” said top companies, across all industries, faced a 20% to 30% probability of falling out of leadership in a five-year period. The chance of toppling from the top ranks had tripled in a generation.
Will this pace of disruption and churn continue during the recession and recovery? I think so. It is tempting to see a recession as a yellow caution flag that slows all cars in the field. But in fact, recessions tend to shake out the old, slow and bloated that masked their decline in flusher times. The 1973-74, 1980 and 1982 recessions dealt death blows to the incoherent conglomerates created during the 1960s. The 1990-91 recession killed off the minicomputer industry and nearly did in IBM. The recession of 2007-09 has shredded the Michigan auto industry. Big city dailies are falling everywhere. Were they killed by the recession or Craigslist? (By both.)
Recovery from this recession is likely to be weak. Rising oil prices amidst increasing supply and falling demand is proof of U.S. dollar weakness and portends stagflation. Real growth for the American economy when recovery starts will be in the 1% to 2% range, instead of the usual 3%. It will be the 1970s again.
But remember: GDP growth is an aggregate number. Peel back this pedestrian top line figure, and what you’ll see is a jagged landscape of booms and busts. Some companies, industries, cities, regions and skill sets were never hurt much and will experience a robust recovery. Others will be mired in permanent depression.
As one example, the New York Times columnist, Bob Herbert, points out the disproportionate problems of uneducated young males:
“The Center for Labor Market Studies is at Northeastern University in Boston. A memo that I received a few days ago from the center’s director, Andrew Sum, notes that ‘no immediate recovery of jobs’ is anticipated, even if the recession officially ends, as some have projected, by next fall
The memo said: ‘Since unemployment cannot begin to fall until payroll growth hits about 1%–and payroll growth will not hit 1% until [gross domestic product] growth hits at least 2.5% to 3%–we may not see any substantive payroll growth until late 2010 or 2011, and unemployment could rise until that time.’
“We’ve already lost nearly 5.7 million jobs in this recession. Those losses, the center says, ‘have been overwhelmingly concentrated among male workers, especially among men under 35.’”
As another example, today’s Wall Street Journal has a fascinating tale of two Michigan cities, Ann Arbor and Warren:
“The divide between Ann Arbor, with a population of 116,000, and Warren, population 126,000, is large and widening. Ann Arbor’s unemployment rate of 8.5% in March trailed the nationwide rate of 9% and was well below Michigan’s overall rate of 13.4%, based on nonseasonally adjusted figures. By contrast, Warren’s unemployment rate of 17.3% is among the highest in the state. The average family income in Ann Arbor was $106,599 in 2007, compared with $69,193 nationally and $60,813 in Warren.
“That economic gulf wasn’t always there. In 1979, the average family in Warren made $28,538 annually, not much below Ann Arbor’s average of $29,840. But in the past 30 years, the U.S. economy has undergone a sweeping transformation that has benefited cities like Ann Arbor and hurt manufacturing hubs like Warren.
“Warren is suffering from its reliance on the auto industry.
“As transportation and communication costs fell, and countries like Japan and, now, China, increased their manufacturing capability, Michigan’s advantages have faded. Those same forces of globalization benefited educated workers–an area where Michigan largely fell short.
The science fiction writer, William Gibson, likes to say: “The future is already here–it is just unevenly distributed.”
Likewise, the economic recovery has already started. But its distribution will be highly uneven.
Uneven recovery?
It seems to be trucking along for donors to Democrats. We will uncover billions of waste in the form of favors and kickbacks. Just like the U. N.
I’ve been hearing a lot on the radio about efforts by policymakers to flatten the economy so that we don’t go through recessions… but I have not seen anything yet that is concrete, probably because it’s such an economically suicidal idea, one that would result in universal poverty.
The only thing I see here vaguely connecting to it is the referrence to “Extreme Competition” which flies in the face of “Too Big to Fail.”
Good read, thank you Mr. Karlgaard
If the money supply does not increase when the production efficiency increase, the only way to keep the inflation above 0%, is to make loan financing cheaper. We’ll end up with an interest rate permanently residing at 0-0.25%. In essence make us all borrowers. No one will own anything except bonds. The consumer market will be 100% financed by borrowed money.
This is what happened to Japan and it’s gonna happen to the US too. Japan just got there first.
“Big city dailies” are NOT falling because of the recession or Craigslist. They are failing because they are one-dimensional liberal propaganda factories.
“Big city dailies” have betrayed the public trust and therefore must fail.
Booms and busts are cyclic. Bankrupting the treasury is not and may certainly fault the recovery, along with the radical changes of big government experimental social programs. How to get there from here, i.e., no car production to 40 mpg cars in a single season, puts us in a long time frame of uncertainty.
What happens when a state goes bankrupt? Would they have to move all of the furniture from California to Nevada, or from Michigan to Indiana?
Good article. That’s an amazing stat about the gap beween Ann Arbor and Warren.
When we do recover, stagflation will hit leading to another recession; our recovery will be a brief respite & a return to a deeper recession.
The Democrats are talking about a second “bailout,” but I hope this will not gain any momentum given the Porkulus bill has been slow to nothing in the economy since it was nothing but a spending bill to the Democrats’ wish list.
Obama & the other Democrats might sink in a stagflation environment as he tries to consolidate his power in the executive branch; however, the Republicans must have good options themselves & other ideas from Obama’s growing Socialism.
It is also possible that we might be going into deflation which could be bad because if companies can not make a profit at these lower prices then they will start laying off and consumers noticing the falling prices might be reluctant to spend thinking that the price might drop even further. I do not really like to link to a site like CNN but it is still a fairly good article right here http://money.cnn.com/2009/02/19/news/economy/deflation/index.htm